What is blockchain technology?

What is Blockchain technology?

Blockchain technology is a distributed database that allows for secure, transparent and tamper-proof transactions. Transactions are grouped into blocks and then linked together using cryptography. Each block contains a timestamp and a link to the previous block, creating a chain of blocks. This allows for a transparent and secure ledger of all transactions. It was created by an anonymous person or group of people under the name Satoshi Nakamoto in 2008.

Blockchain technology can be used to create a public ledger of all cryptocurrency transactions. This ledger is constantly growing as “completed” blocks are added to it with a new set of recordings. Each block contains a cryptographic hash of the previous block, a timestamp and transaction data.

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cryptographically hash of the previous block, a timestamp and transaction data. Each block contains a cryptographic hash of the previous block, a timestamp and transaction data.

Because blockchain is decentralized, it is immune to the problems that can occur with centralized databases, such as:

  • hackers accessing and modifying data,
  • third-party interference, such as fraud or censorship

In addition, blockchain technology allows for “smart contracts,” which are self-executing

How Blockchain Work?

A blockchain is a digital ledger of all cryptocurrency transactions. It is constantly growing as “completed” blocks are added to it with a new set of recordings. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data. Bitcoin nodes use the block chain to differentiate legitimate Bitcoin transactions from attempts to re-spend coins that have already been spent elsewhere.

The blockchain is a distributed database – to achieve independent verification of the chain of ownership of any and every bitcoin amount, each network node stores its own copy of the blockchain. Approximately every 10 minutes, a new group of accepted transactions, a block, is created, added to the blockchain, and quickly published to all nodes, without requiring central oversight. This allows bitcoin software to determine when a particular bitcoin amount has been spent, which is necessary in order to prevent double-spending in an environment without central oversight.

How Is Blockchain Used?

Blockchain technology is used for many different purposes, from providing financial services to administering voting systems.

Cryptocurrency

The most common use of blockchain today is as the backbone of cryptocurrencies, like Bitcoin or Ethereum. When people buy, exchange or spend cryptocurrency, the transactions are recorded on a blockchain. The more people use cryptocurrency, the more widespread blockchain could become.

“Because cryptocurrencies are volatile, they are not yet used much to purchase goods and services. But that is changing as PayPal, Square and other money service businesses make digital asset services broadly available to vendors and retail customers,” notes Patrick Daugherty, senior partner of Foley & Lardner and lead of the firm’s blockchain task force.

Asset Transfers

Blockchain can also be used to record and transfer the ownership of different assets. This is currently very popular with digital assets like NFTs, a representation of ownership of digital art and videos.

However, blockchain could also be used to process the ownership of real-life assets, like the deed to real estate and vehicles. The two sides of a party would first use the blockchain to verify that one owns the property and the other has the money to buy; then they could complete and record the sale on the blockchain.

Using this process, they could transfer the property deed without manually submitting paperwork to update the local county’s government records; it would be instantaneously updated in the blockchain.

Banking

Beyond cryptocurrency, blockchain is being used to process transactions in fiat currency, like dollars and euros. This could be faster than sending money through a bank or other financial institution as the transactions can be verified more quickly and processed outside of normal business hours.

Smart Contracts

Another blockchain innovation are self-executing contracts commonly called “smart contracts.” These digital contracts are enacted automatically once conditions are met. For instance, a payment for a good might be released instantly once the buyer and seller have met all specified parameters for a deal.

“We see great potential in the area of smart contracts—using blockchain technology and coded instructions to automate legal contracts,” says Gray. “A properly coded smart legal contract on a distributed ledger can minimize, or preferably eliminate, the need for outside third parties to verify performance.”

Supply Chain Monitoring

Supply chains involve massive amounts of information, especially as goods go from one part of the world to the other. With traditional data storage methods, it can be hard to trace the source of problems, like which vendor poor-quality goods came from. Storing this information on blockchain would make it easier to go back and monitor the supply chain, such as with IBM’s Food Trust, which uses blockchain technology to track food from its harvest to its consumption.

Voting

Experts are looking into ways to apply blockchain to prevent fraud in voting. In theory, blockchain voting would allow people to submit votes that couldn’t be tampered with as well as would remove the need to have people manually collect and verify paper ballots.

What are the Advantages of Blockchain

Higher Accuracy of Transactions

Because a blockchain transaction must be verified by multiple nodes, this can reduce error. If one node has a mistake in the database, the others would see it’s different and catch the error.

In contrast, in a traditional database, if someone makes a mistake, it may be more likely to go through. In addition, every asset is individually identified and tracked on the blockchain ledger, so there is no chance of double spending it (like a person overdrawing their bank account, thereby spending money twice).

No Need for Intermediaries

Using blockchain, two parties in a transaction can confirm and complete something without working through a third party. This saves time as well as the cost of paying for an intermediary like a bank.

It has the ability to bring greater efficiency to all digital commerce, to increase financial empowerment to the unbanked or underbanked populations of the world and to power a new generation of internet applications as a result.

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Extra Security

Theoretically, a decentralized network, like blockchain, makes it nearly impossible for someone to make fraudulent transactions. To enter in forged transactions, they would need to hack every node and change every ledger. While this isn’t necessarily impossible, many cryptocurrency blockchain systems use proof-of-stake or proof-of-work transaction verification methods that make it difficult, as well as not in participants’ best interests, to add fraudulent transactions.

Since blockchains operate 24/7, people can make more efficient financial and asset transfers, especially internationally. They don’t need to wait days for a bank or a government agency to manually confirm everything.

What are the Disadvantages of Blockchain

Limit on Transactions per Second

Given that blockchain depends on a larger network to approve transactions, there’s a limit to how quickly it can move. For example, Bitcoin can only process 4.6 transactions per second versus 1,700 per second with Visa. In addition, increasing numbers of transactions can create network speed issues. Until this improves, scalability is a challenge.

High Energy Costs

Having all the nodes working to verify transactions takes significantly more electricity than a single database or spreadsheet. Not only does this make blockchain-based transactions more expensive, but it also creates a large carbon burden on the environment.

Because of this, some industry leaders are beginning to move away from certain blockchain technologies, like Bitcoin: For instance, Elon Musk recently said Tesla would stop accepting Bitcoin partly because he was concerned about the damage to the environment.

Risk of Asset Loss

Some digital assets are secured using a cryptographic key, like cryptocurrency in a blockchain wallet. You need to carefully guard this key.

“If the owner of a digital asset loses the private cryptographic key that gives them access to their asset, currently there is no way to recover it—the asset is gone permanently,” says Gray. Because the system is decentralized, you can’t call a central authority, like your bank, to ask to regain access.

Potential for Illegal Activity

Blockchain’s decentralization adds more privacy and confidentiality, which unfortunately makes it appealing to criminals. It’s harder to track illicit transactions on blockchain than through bank transactions that are tied to a name.

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